IRS Issues Final Portability Regulations

On June 12, 2015, the Treasury issued Final Portability Regulations (TD 9593, IRB 2012-28) which clarifies previous regulations, as well as responds to comments made to the Treasury by the American Bar Association’s Real Property, Trust, and Probate Law Section. The final regulations substantively address a few of the inquiries made. The regulations remove the earlier temporary regulations and provide guidance on portability rules for estates of married decedents dying on or after January 1, 2011 and the surviving spouses of those decedents.
The guidance under the final regulations applies only to estates of decedents dying after the date that the regulations were issued. The temporary regulations will continue to apply to estates of decedents dying between January 1, 2011 and June 12, 2015. Treas. Reg. §§ 20.2010-1(e), 2(e), and 3(f). Therefore, guidance has not changed for those decedents dying prior to the issuance of the final regulations.
The concept of “portability” refers to an election that may be made on a decedent’s estate tax return, which permits a decedent’s surviving spouse to inherit the unused Federal estate tax exemption of their predeceased spouse (this inherited amount is referred to as the Deceased Spousal Unused Exemption Amount or “DSUEA”). Portability was initially a temporarily relief for married persons dying after 2010 and was made permanent by the American Taxpayer Relief Act of 2012 (“ATRA”).
The fundamental portability qualification requirements remain unchanged including: (1) the decedent must be a U.S. citizen or resident alien; (2) the election must be made on a timely estate tax return (filed within 9 months of date of death or within 15 months with an automatic extension); and (3) the estate tax return must be complete (unless simplified reporting applies, in which substantiation of valuation is not necessary when the estate passes under an estate tax marital or charitable deduction and the value is not needed to compute any non-deductible transfer). Only the DSUEA from the last deceased spouse may be used by the surviving spouse against otherwise taxable gifts or on death.
In the final regulations, the IRS provided some guidance on what is considered a “complete and properly prepared” estate tax return sufficient to make the portability election. Advisors sought clarification on this topic, as a variety of simple technical deficiencies on a return that could otherwise be easily rectified caused concern that the election would be lost. Advisers were also concerned that a return mistakenly prepared using the simplified requirements could later materialize into situation in which a complete return was required. Declining to elaborate on specific circumstances that would render a return deficient and incomplete, the IRS stated that it “consider[s] the issue of whether an estate tax return is complete and properly prepared to be determined most appropriately on a case-by-case basis.” The IRS offered a glancing reassurance that a taxpayer can cure any defects by acknowledging that some “errors or omissions [on] an estate tax return will be considered minor and correctible.”
The Treasury also addressed the tax consequences under circumstances in which a non-citizen spousal beneficiary of a Qualified Domestic Trust (“QDOT”) later becomes a United States citizen. Prior to the issuance of the final regulations, it was clear that a United States citizen decedent may pass his or her DSUEA amount to his or her surviving spouse who is not a United States citizen, assuming that the estate is left to the surviving spouse in a QDOT. The DSUEA amount of the deceased spouse would not be “ported” over to the surviving spouse at death, but rather, the transfer would be delayed until the assets of the QDOT are fully subject to estate tax, i.e. at the surviving spouse’s death. The predeceased spouse’s DSUEA amount would thereafter be reported on the surviving spouse’s estate tax return. The final regulations clarify that the deceased spouse’s available DSUEA amount will be automatically transferred to the surviving spouse in the event he or she becomes a United States citizen during the QDOT term. See Treas. Reg. § 20.2010-3(c)(2) and Treas. Reg. § 25.2505-2(d)(3)(ii).
The final regulations also confirm that discretionary extensions of time may be available for estates that only had to file a Federal estate tax return in order to elect portability and that no protective portability election is required when the amount or even existence of a DSUEA amount is uncertain. The Treasury declined to include any provisions indicating the release of an abridged estate tax return to be utilized solely for making a portability election.
These final regulations on the portability election provide some guidance and clarification for concerns taxpayers had under the temporary regulations. For more information about the portability election, or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com. This blog post was written with the assistance of Ryann M. Aaron.